Sunday, June 26, 2005

Onto the next bubble ...

The stock bubble came to an end in late 2000. But speculators moved on, to real estate, helped by the low interest rates. Real estate prices, which moved nowhere or down for a few years in the early 90's (try getting people to admit that now!), started taking off. As interest rates go up, atleast in the short term, the question is when will the real estate cooling start ? And more importantly what happens next ?

With long term rates falling, and the continued narrowing of the gap between short and long term rates, the markets are already predicting a slowdown ahead, which will likely bring with it interest rate cuts soon. These rate cuts may actually give a new lease of life to the real estate bubble, but will take it to even more dangerous territory (think Japan, where the real estate market crash of the late 80's led to price drops of upto 80%, where they still stay today!).

A few will move on to the next bubble. With the stock market crash still fresh in memory, it is unlikely that a good amount of money will return to the market to cause a substantial boom. More likely that most will turn towards the bond market, or even (this borders on sacrilege!) plain old savings. The return to market in full strength is probably another 5 years away. If your time frame is atleast that long, you should not wait, but keep adding to your basket.